I was the senior retail analyst at Morgan Stanley for 16 years, following a 20 year career at retailers including Macy’s, May Department Stores and Allied Stores. Currently I head Loeb Associates Inc. a management consulting and strategic advisory firm for leading domestic and international retail companies. I was a director of the National Retail Federation (NRF) as well as several leading retail companies including The Hudson Bay Co, Gymboree Corp. and Federal Realty Investment Trust. In addition to publishing the acclaimed Loeb Retail Letter, I have been, for several decades, quoted in the media on events and trends in the retail industry in top business and trade publications.

After preparing a 2012 sales projection for J.C.Penney, I believe full year sales will be lower by -16.8% to -19.6% (see table). This projection assumes that the company will have a total sales drop of about 25% in the second quarter that is just ending, followed by continued double digit declines in the second half of 2012. As a result, store closings and asset write downs are likely.

I estimate that some 250 stores will be classified as impaired by management by the end of the year and that the company will have to write down the assets. I believe that some smaller stores, particularly the remaining “Golden Rule” stores, will have to be closed. Some of the Golden Rule stores are located in small mid-western cities like Warren, MI, Muncie, IN, and St. Paul, MN. While writing down assets does not necessarily mean that a store will close, it certainly is a step toward streamlining the company in order to focus on the profitable units. Many of J.C.Penney’s smaller stores are kept open because of low rent costs. However, when the cost to maintain these stores is considered, low rent may not be enough to justify investing in outdated, low productivity units.

The current negative sales trends at J.C.Penney are playing a part in causing some of the stores to become less viable. Unfortunately, I believe that without significantly stronger promotions, the second half of 2012 will remain difficult for J.C.Penney. Having said this, I think the declines will moderate slightly for several reasons: first, comparisons with the second half of 2011 are easier than they have been in the first half. In 2011 total sales dropped -4.8% in the third quarter and -4.9% in the fourth quarter. In addition, certain initiatives – such as free haircuts for kids in August and an emphasis on uniforms for school children – should give a lift to traffic compared to the first six months of 2012. Lastly, 700 jeans shops will be up and running. I think jeans will be hot for fall and the stores with shops will benefit from the new department and the available assortment.

I visited the new Levi Jean shops at J.C.Penney in the Manhattan Mall at 33rd Street in New York City. While I liked the iPods as selling aids – I was surprised at the small size of the women’s Levi shop as compared to the men’s shop. During my visit I noted more customers in the woman’s department than in the men’s department by a factor of three.

Ron Johnson, CEO of J.C.Penney, announced that by 2014 cash registers will be eliminated and will be replaced by a system that would require fewer store level sales associates and more self-checkouts. In order to do that, the company will switch from traditional bar coded tags to RFID tags. While this sounds exciting and works in Apple stores, I have severe reservations that department store customers be happy with such an arrangement. However, in this new century, new ideas must be tried in order for the retail industry to remain viable. I would not be surprised if some adjustments are required.

My 2012 J.C.Penney sales projection is listed below. My projections assume that the store transformation program will stop before the Christmas selling season begins. The shops that have been announced for September include Liz Claiborne, Izod and jcp (a new brand).

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